Keynes, Malthus and Karl Marx on Says Law of Markets - Essay Example

Keynes, Malthus and Karl Marx on Say's Law of Markets Economist Jean Baptiste Say of France propounded his Law of Markets in his book "Traite'd'Economie Politique" published in 1803. This law is explained in Book I, chapter XV, "Of the Demand or Market for Products." Today the law is taught is a fallacy of classical economics. This rejection has been the result of the critiques directed towards it, mainly by Thomas Malthus, Karl Marx, and most significantly, John Maynard Keynes. Thomas Malthus was the first to challenge Say's Law in 1820. After him Karl Marx criticized it virulently. Keynes was the one who completely refuted Say's Law, so much so that he said that the opposite of the law was actually the truth. In this paper we will analyze the criticisms of all these three major economists in comparison with each other. Say's Law J.B.Say believed that production causes consumption, that is, production is the main source of consumption. What, and how much a person demands depended on the income produced by their own acts of production. Say says that a person pays for goods and services through goods and services. This means that the demand for a commodity is a function of the supply of other commodities. Say's Law of Markets explains the process through which supplies in general are converted into demands in general. Say found that supply will be equal to the demand for other goods. For him, since demand results from the production of products, so there can never be excess supply over demand. Thus, Say believes that there cannot be general overproduction in an economy. He did say that it was possible to have a surplus or shortage of a particular commodity, but these gluts of production were not a result of general overproduction, but instead they were a result of overproduction of a certain good in comparison with other goods which were under produced. So he accepted that there could be short term gluts in an economy, but that it will right itself automatically through the mechanism of prices. He wrote in his "Treatise on Political Economy": "Garnier, in the notes he joins to his excellent translation of Adam Smith, says that in the old nations of Europe, where capital has accumulated for centuries, a superabundance of annual product would be an obstruction to circulation were it not absorbed by a proportionate consumption. I can see that circulation can be obstructed by superabundance of certain products, but that can only be a passing evil, for people will soon cease to engage in a line of production whose products exceed the need for them and lose their value, and they will turn to the production of goods more in demand. But I do not see how the products of a nation in general can ever be too abundant, for each such product provides the means for purchasing another." (Translated by Palmer 1997, p.76, Cottrell 1997, p.2) Thus, Say implies that an adjustment in production, prices or marketing strategies would lead to the removal of disequilibrium - arising from overproduction in a particular type of product - in a free market economy. This is the basic proposition of Say's Law of Markets. Say also believed that savings are beneficial for the economy and are a means of future growth. So they are even better than consumption. He said that savings are led immediately into investments in pursuit of profits, so there would be no deficiency of income, production or consumption. This means that income is always spent either on satisfying current wants through consumption or satisfying future wants through savings accumulation. Hence the market would automatically return to equilibrium even if some income is not devoted to consumption but rather goes to investment. So, general under consumption, just like general over production of a product was not possible, ever. He made an implicit assumption that prices and wages should be flexible. (Anderson) For him money was only a medium of exchange and not a store of wealth. As an inference, Say denounced government interference with the pricing system. Say's law was disproved or "discredited" (Michael Harrington 1981) during the depression. Before that it was already criticized by Thomas Malthus, and again, vehemently by Karl Marx, who attacked Say's Law with strong words like "preposterous," "childish babble," "pitiful claptrap," "a paltry evasion" and also declared Say to be "dull," "inane," "miserable," "thoughtless," and a "humbug" (Anderson). J.M.Keynes provided the most convincing rebuttal of Say's Law. He also gave the popular phrase by which Say's Law is known today: "supply creates its own demand." This is what he perceived Say as saying, and he refuted it in his historical work titled "The General Theory of Employment, Interest and Prices" in 1937. Critiques by Keynes, Malthus and Marx Malthus and Keynes Malthus, in his publication titled "Essay on Population," wrote that: "Effectual demand consists of two elements, the power and will to purchaseA nation must certainly have the power of purchasing all that it produces, but I can't easily conceive it not to have the will." Malthus argued that the poor workers who survive at subsistence level may be satisfied with the life of "simplest food, the poorest clothing, and the meanest houses . . . ." (Malthus, p. 9 in Anderson, 14). Then, increasing incomes, through increased productivity, would not result in increased consumption of their production. This means that the smaller and richer upper classes are left with the burden of consuming what is not consumed, that is, the surplus. He doubted that they would take that burden. Malthus criticized another assumption, by Say, that goods could always be exchanged for goods. He noted that goods were not just "mathematical figures" but were a means to satisfy human wants. So, if the wants were satisfied but extra income was still left, then it would result in a glut. He, thus, applied the "desire test" to demand in addition to the "means test" given by Adam Smith. He noted that with an increase in productive capacity the "capitalists themselves, together with the landlords and other rich persons" might "save from their revenue and add to their capital," in effect, withholding money and decreasing "effectual demand" (Malthus, 1836: 314-22) (Hodgeson, p.3). Malthus influenced Keynes significantly with his arguments, even though Malthus's reasoning is considered week and mutually inconsistent in comparison with Keynes' valid denial of Say's Law. Malthus's critique ignored Say's unreal assumption that economic analysis deals with a barter economy. Keynes criticized Malthus for overlooking this fact in chapters 3 and 23 of The General Theory. Keynes writes that Malthus "was unable to explain clearly (apart from an appeal to the facts of common observation) how and why effective demand could be deficient or excessive," that he "failed to furnish an alternative construction" (1936, p. 32). He says that "Malthus's defect lay in his overlooking entirely the part played by the rate of interest" (1963, p. 123). But he also grants that "the notion of the insufficiency of effective demand takes a definite place as a scientific explanation of unemployment'' (1936, p. 362). He also appreciated that "Malthus is dealing with the monetary economy in which we happen to live." (Keynes, 1963, p.116, Hodgeson, p.4) and approves Malthus's "complete comprehension of the effects of excessive saving on output via its effects on profit." Keynes was so greatly influenced by the Malthus's arguments that he said "If only Malthus rather than Ricardo had been the parent stem from which nineteenth-century economics proceeded, what a much wiser and richer place the world would be to-day!" Malthus did support Say when he said that any permanent and continued increase of wealth can only result from a continued increase of capital, which requires saving. But he said that accumulation is not necessarily beneficial at all times. "Excessive parsimony," according to him, would lead to a glut of commodities. Malthus considers only two elements, laborers' consumption and capitalists' consumption. He says that any accumulation would leave the former unchanged while it will reduce the latter (Cottrell, 1997). Keynes however did not accept this argument. Keynes also considered investment in his criticism of Say's Law. Malthus also criticized Say on another account in that it failed to take "into consideration the influence of so general and important a principle in human nature, as indolence or the love of ease" (Ricardo 1951 p. 313, in Cottrell, p.9). He says that Say's Law rests on the assumption that "luxuries are always preferred to indolence. The effect of a preference of indolence to luxuries would evidently be to occasion a want of demand for the returns of the increased powers of production, and to throw labourers out of employment." (Ricardo p.313, Cottrell) Thus, Malthus made a significant contribution to disproving Say's Law. His arguments were taken up by none other than Keynes in his final rebuttal of Say's Law. According to Wood, Keynes is exactly opposite to Malthus in one important respect. Malthus has attacked Say's Corollary but has accepted Say's Law, whereas Keynes does not actually criticize Say's Corollary, but denies Say's law. However, the two economists are similar in one aspect. Both Keynes and Malthus have rejected Say's Law of Markets. In the process they also refute the philosophy of liberalism which forms an integral part of the law (Wood & Kates 2000, p.327). Marx and Keynes Karl Marx directed the most virulent attack on Say's Law of Markets. According to him, Say, in his theory, implies that since every sale also implies purchase so there must be a general equilibrium in commodity transactions. Marx instead believes that commodity circulation has its own disequilibria (Arestis & Sawyer, p. 193). "Nothing can be more childish than the dogma that because every sale is a purchase, and every purchase a sale, the circulation of commodities necessarily implies an equilibrium of sales and purchases. But no one is forthwith bound to purchase because he has just sold. Circulation bursts through all restrictions as to time, place and individuals." (Capital I, pp.113-14, in Arestis and Sawyer) Keynes overestimated the analytical relevance of Malthus's critique while underestimating Marx's contribution. "Marx's critique and rejection of Say's Law are based on analytical concepts that in fact bring him very close to Keynes" (Wood 2000). According to Marx, the function of money in a capitalist economy was more than simply as a medium of exchange: it was also a store of value. Hence it could be hoarded or kept idle. Therefore, he believed that Say's Law of Markets is valid only in a non-capitalist or barter economy. Marx considered a more developed economy which also contained banking and credit. Here, hoarding becomes necessary in order to meet future payments at the due date (Marx 1954, pp. 139-41, in Mattick 1955)). Marx had pointed out 75 years before Keynes that only an accelerated capital expansion leads to an increase in employment (Mattick 1955). He had also clarified the difference between consumption, and consumption under conditions of capital production. Marx commented on J.B.Say as "dull and comical 'prince de la science," whom "Marx did not find worth overthrowing, even though "his continental admirers have trumpeted him as the man who had unearthed the treasure of the metaphysical balance of purchase and sales" (Mattick 1955). He found Say's Law of Markets to be complete nonsense in the presence of "a growing disequilibrium between the profit needs of capital expansion and the rationally considered productive requirements of men, and between the 'social demand' in capitalism and the actual social needs; and he also pointed out that capital accumulation implies an industrial reserve army" (Mattick 1955). Marx did not perceive an economic character in the inherent contradictions of capital production. He was only concerned with increasing productivity of labor and its social implications. He found that for profits to increase continuously in a capitalist system there must be a continual process of accumulation. More and more surplus value must be extracted from production. As long as this happens the capitalist system will prosper and in the case where accumulation stops, it leads to crisis and depression. "Both Marx and Keynes, then, though for different reason, recognize the capitalist dilemma in a declining rate of capital accumulation" (Mattick 1955). For Keynes, the cause was a lack of incentive to invest, while Marx looks at the social character of production and as a production of capital (Mattick 1955). Marx says that a continuous capital accumulation presupposes periods of crisis and depression. He finds that crisis is an "equilibrium mechanism" in capitalism. In the period of depression, the capital structure changes to restore the lost profitability and, thus, leads to further capital expansion. Keynes, however, does not consider crisis and depression as necessary to the process of capital formation. He says that it may be the case only under laissez-faire conditions, and that too only when "economic equilibrium does not include full employment." (Mattick 1955). Keynes revolutionary analysis, thus, is considered a partial restatement of Marx's arguments against capitalist economy. Marx's criticism of classical theory is similar to Keynes' criticism of neoclassical theory. Keynes like Marx considered economic aggregates. But Marx's analysis of the economic aggregates led him to discover the basic trend of capital accumulation only, while Keynes' analysis led him to formulate a policy which is able to support the trend without damaging the capitalist conditions of production. Keynes' analysis divides the closed system into two departments of production. One produces consumption goods and the other produces capital goods. The total money expenditure in terms of wages is equal to the total income. When aggregate demand is equal to the total income and, total savings are equal to investments, then there is equilibrium in the system. In case of any discrepancy in savings and investment, aggregate demand is used to increase total income to full employment level. However, in Marx's system, the constant capital is the property of capitalist class and the variable capital is the social equivalent of labor power; the surplus-value is the accumulation and income source of the ruling class (Mattick 1955). He believes that only the capitalist class can hoard money and so, in general, overproduction would only come from the decisions of that class to increase its holding of idle balances in relation to the amount of money it spends in production. For him this led to the capitalist exploitation of labor. Keynes Keynes provided the most acceptable analysis and criticism of Say's Law of Markets. The neoclassical thinking was developed around Say's Law. In the neoclassical analysis, the rate of interest played a very important role in producing equilibrium between saving and investment. And, in return, "this equilibrium ensured that the portion of income not spent on consumption goods would be spent on investment goods." (Chapter 8) Money was sterile and lacked in intrinsic value. It was used only as a medium of exchange. Thus, hoarding would be irrational in this analysis. Keynes attack on Say's Law was based on this role of money. He analyzed money as it was held, rather than when it was in motion. He proposed that there is a speculative motive as well to holding cash, apart from transaction and precautionary motives. In this role, it also is a store of value. Thus, hoarding could not be ruled out as an irrational activity. In such a case, part of the income stream in an economy can leak into idle hoards, and underemployment equilibrium would be the rule rather than the exception. Also, the system would not be self adjusting towards full employment equilibrium. Keynes, thus, showed that Say's Law would be untenable in the normal situation. Keynes' analysis has been popularly accepted as law since then. Conclusion Say's Law of Markets was a popular theory among the classicists and neoclassicists. Malthus criticized some aspects of the law, but Karl Marx rejected it outright as sheer nonsense. Keynes provided the most complete rebuttal of the law. He pushed Say's law into being considered as one of the fallacies of economic theory. His analysis and rebuttal were also borne out in the depression years, and his suggestions have influenced government policies since then. Works Cited Anderson, William L. "Say's Law: Were (Are) The Critics Right" [Online]www.mises.org/journals/scholar/sayslaw.pdf Arestis, Philip & Sawyer, Malcolm C. "A Handbook of Alternative Monetary Economics." Google Books Online. Cottrell, Allin. "Keynes, Ricardo, Malthus and Say's Law." History of Economic society, June 1997. [Online] www.wfu.edu/cottrell/says_law.pdf "CHAPTER 8.The Economics of Keynes's General Theory." [Online]http://www.wesleyan.edu/css/readings/Barber/chapter8.htm Hodgson, Geoffrey M. 2004. "Malthus, Thomas Robert (1766-1834)." Biographical Dictionary of British Economists, edited by Donald Rutherford (Bristol: Thoemmes Continuum). 2004 [Online] www.blupete.com/Literature/Biographies/Philosophy/Malthus.htm Mattick, Paul. 1955. "Marx and Keynes." Libcom.org. July 27, 2005. [Online]http://libcom.org/library/marx-and-keynes-mattick Wood, John Cunningham, Kates, Steven. "Jean-Baptiste Say: Critical Assessments of Leading Economists." Routledge 2000. 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